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The Consumer Financial Protection Bureau filed its first lawsuit against a for-profit company, accusing ITT Educational Services of making predatory loans to its students.
ITT Educational Services is one of the largest and most expensive for-profit post-secondary education chains in the country. It has schools in 40 states, including more than 135 ITT Technical Institutes and Daniel Webster College. Courses range from electronics and drafting to criminal justice and nursing.
In its lawsuit, filed Wednesday, the CFPB claims ITT used high-pressure tactics to push many students into high-cost private loans it knew they couldn’t repay.
“Although ITT marketed itself as improving consumers’ lives, it was really just improving its bottom line,” said CFPB director Richard Cordray. “The result was that while many students got poorer, the investors and shareholders got richer.”
When asked about the lawsuit, ITT’s vice president of government relations, Nicole Elam, told NBC News: “We do not comment on pending litigation other than to say that the bureau’s claims are without merit and we intend to vigorously defend ourselves against the charges.”
According to the bureau, ITT has some of the highest tuition costs of any for-profit school in the country. Earning an associate’s degree can cost more than $44,000; a bachelor’s degree can cost $88,000.
Federal student loans won’t cover the entire bill, so most ITT students also need private loans. The school offered to help new students bridge this tuition gap with a zero-interest loan — called “temporary credit” — that typically had to be repaid at the end of the first academic year.
The CFPB claims ITT knew that most students would not be able to pay back that temporary credit loan or fund their second year’s tuition.
The lawsuit alleges that between July and December 2011, ITT convinced many students to repay the temporary credit and cover the tuition gap for year two with a high-priced private loan that it set up for just this purpose.
“ITT kept students in the dark about its lending model that it freely shared with investors,” Cordray said.
“In some cases, students did not even know they had a private student loan until they started getting collection calls.”
For students with credit scores under 600, these loans had interest rates as high as 16.25 percent for 10 years, plus a 10 percent origination fee. Cordray compared that to financing a college education on your credit card.
“In fact, we found that ITT used its financial aid staff to rush students through an automated application process without affording them a fair opportunity to understand the loan obligations involved,” Cordray said. “In some cases, students did not even know they had a private student loan until they started getting collection calls.”
The National Consumer Law Center commended the CFPB for taking this action. In 2011, NCLC released a report that documented many of the problems associated with loans offered by private for-profit schools.
It found that most of them had higher interest rates and origination fees than federal loans, particularly for less creditworthy borrowers and a default rate that was “shockingly high.” Many also came with “hair-trigger default clauses” that can kick in if the student misses just one payment or leaves the school without graduating.
The “unfair, deceptive or abusive” practices alleged in the CFPB’s lawsuit deal with more than student loans.
The consumer bureau claims ITT misled prospective students by overstating job prospects and likely salaries after graduation. In reality, the lawsuit claims, ITT knew a majority of students — about 64 percent by its own estimate — would default on their loans and not finish school.
Defaulting on private student loans can have devastating consequences. It can limit employment opportunities and make it impossible to get any kind of loan for years. And because private loans are nearly impossible to discharge in bankruptcy, they can haunt the borrower for a long time.
Joe Larson, who attended the ITT Technical Institute in Clive, Iowa, to get a degree in electrical engineering, was happy to hear about the federal lawsuit. Last year, he filed a complaint with the Iowa State Attorney General’s Office.
“I have not taken a single class that has been oriented toward Electrical Engineers,” he wrote. “The curriculum is a joke.”
Larson, who spent $16,000 for two semesters at the school, told NBC News the recruiter promised him “awesome job opportunities” after graduation. But he feels he didn’t learn anything.
An industry under scrutiny
There's nothing wrong with an educational institution making a profit. Indeed, students who attend the right for-profit school may be able to get a pay increase, promotion or better job.
But there is a growing sense among government regulators that some of these for-profit schools take the money — federal aid and student loans — and don't deliver on their promise of providing degrees that lead to good jobs.
Look at these numbers from the National Center for Education Statistics: For students starting a four-year bachelor’s degree program in 2004, just 28 percent of those attending for-profit schools graduated within six years. That’s half the rate for students at public institutions.
Prosecutors in several states, including California, Colorado, Illinois, Massachusetts and New York, have sued various for-profit schools.
“It’s easy to identify the bad actors,” said Illinois Attorney General Lisa Madigan. “It’s the very aggressive and misleading marketing and advertising, the very heavy-handed recruitment, excessive tuition, lack of accreditation, the low completion and job placement rates and high default levels.”
A task force of attorneys general from 13 states is investigating four of the larger for-profit colleges, including ITT, after receiving numerous complaints from students and former students. Last month, they filed legal papers demanding documents from ITT, Corinthian Colleges, Education Management Corporation and Career Education Corp. This demand for documents is not an accusation of wrongdoing.
Iowa Attorney General Tom Miller, a member of that task force, said he’s concerned about for-profit schools that use boiler-room operations to recruit students “where there’s pressure to make sales and over time deception creeps in.”
“That’s a terrible way to sign up people for something as important as college education,” he said.
The Consumer Financial Protection Bureau has a great deal of information on its website to help you decide how to pay for college.